Turbulent financial times can lead to long-term success for savvy investors

by Lucas Bucl, CFP® 

It has been a tough year in the investment markets.

The stock market is down considerably, with the S&P 500 index off over 16% this year (through July 19). The US bond market is also down double digits, with the Bloomberg Aggregate Bond index down 10% over the same period.

Times like these are usually uncomfortable for people with money invested in the markets. However, volatile times often provide opportunities to put you in a better financial position down the road.

Here are financial planning ideas to consider in these challenging times:

REBALANCE YOUR PORTFOLIO

When markets make big moves, portfolios can get out of alignment. Now is a good time to consider rebalancing your investments back to target. This often means selling investments that have done better and buying the things that are down the most

While this may feel uncomfortable, buying assets at lower prices right now could give you more upside potential when things rebound. Taking a disciplined approach to rebalancing is a good way to take the emotion out of your investment strategy and help set you up for long-term success.

FUND YOUR IRAS AND HSAS

Most people wait until the end of the year, or even close to the tax filing deadline, to make their Roth IRA (Individual Retirement Account), Traditional IRA and health savings account (HSA) contributions. If you have the cash, consider making those contributions now and buying at the current lower prices.

A note about HSAs: Many people keep these accounts in cash and use them to pay current medical expenses. If you don’t need to use the funds now, you can take advantage of the tax-free growth structure of these accounts by investing and growing the account for future healthcare expenses in retirement.

CONSOLIDATE YOUR ORPHAN ACCOUNTS

If you have an old retirement or HSA account somewhere that you have been neglecting, now could be a good time to consolidate this account and make sure the funds are properly allocated. Consider allocating these funds to the areas of your main portfolio that are down the most.

CONSIDER A ROTH IRA CONVERSION

A Roth conversion is a strategy where you take money from a pre-tax IRA and move it to an after-tax Roth IRA. The conversion amount will be considered taxable income in current year, but the funds moved into a Roth IRA grow tax free and future distributions are also tax free.

Completing a Roth conversion during a down market allows you to buy growth-oriented investments in a Roth IRA at lower prices and benefit from the tax-free growth when markets recover.

INCREASE YOUR RETIREMENT PLAN CONTRIBUTIONS

If you can, consider bumping up your regular contributions to your retirement plan. The idea is to contribute more while prices are lower. You can always adjust the contribution back down later if needed

TAX LOSS HARVESTING

If you own investments at a loss in a brokerage account (not a retirement account), consider selling the investments at a loss to “harvest” the tax loss.

You can use capital losses to offset any realized capital gains in the current year, and then write off up to $3,000 against other income. Losses exceeding this amount are carried forward to future years and offset future gains. This can help save some money on your taxes this year, and possibly future years.

It is typically recommended to find a similar, but not a “substantially identical” security to purchase and maintain the investment exposure in the portfolio. You can buy your original investment back after 30 days and avoid the “wash sale” rule, which wipes out the tax benefit of taking the loss.

Tax loss harvesting doesn’t always make sense, especially if you are in a low tax bracket. If you are unsure, seek out some professional tax advice to make sure you will benefit from this strategy.

Managing through down markets is part of being a long-term investor. Look to take advantage of the opportunities that often present themselves during these turbulent times. These strategies can help set you up for long-term success and get closer to achieving your long-term goals.

Read or listen to this article published July 27, 2022 in the KC Star

 

Lucas Bucl is a CERTIFIED FINANCIAL PLANNER™ professional and a member of Financial Planning Association of Greater Kansas City. As a partner at Aspyre Wealth Partners in Overland Park, he helps clients define what success means to them, and then craft and execute a plan to achieve it.

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